14th May 2020 - Early AUD gains erased as risk sours on Fed comments

Good morning

OVERNIGHT DATA AND HEADLINES

U.S. producer prices fell by the most since 2009 in April, leading to the largest annual decline in nearly 4-1/2 years, bolstering some economists' predictions for a brief period of deflation. The producer price index for final demand tumbled 1.3% last month, the biggest decline since the series was revamped in December 2009, after slipping 0.2% in March. In the 12 months through April, the PPI decreased 1.2%. That was the biggest drop since November 2015 and followed a 0.7% increase in March. Economists polled by Reuters had forecast the PPI falling 0.5% in April and declining 0.2% on a year-on-year basis.

The head of the Federal Reserve warned of an "extended period" of weak economic growth, vowed to use the U.S. central bank's power as needed, and called for additional fiscal spending to stem the fallout from the coronavirus pandemic. Fed Chair Jerome Powell issued his sober review of an economy slammed by a record pace of job losses and bracing for worse ahead as most U.S. states moved toward reopening after weeks of shutdowns aimed at slowing the spread of the novel coronavirus. Powell pointed to uncertainty over how well future outbreaks of the virus can be controlled and how quickly a vaccine or therapy can be developed, and said policymakers needed to be ready address "a range" of possible outcomes.

The RBNZ on Wednesday doubled the amount of bonds it will buy as part of its quantitative easing programme and flagged a possible shift to negative interest rates as the COVID-19 pandemic wreaks havoc on the economy. The Reserve Bank of New Zealand (RBNZ) left its official cash rate (OCR) at 0.25%, as expected, but said it was prepared to use additional tools "if and when needed" including further cuts and expanding its quantitative easing programme to include foreign assets. The signal that rates could go below zero comes as the bank predicted a massive 21.8% contraction in June quarter gross domestic product, followed by a 23.8% expansion in the next quarter. The central bank re-affirmed its forward guidance for the cash rate to remain at 0.25% until early 2021 but said negative rates "will become an option in future.”

The S&P 500 closed lower for the second day in a row after Federal Reserve Chairman Jerome Powell warned on Wednesday of extended economic weakness and called for Congress to agree on additional fiscal support. Stocks sold off as investors appeared to price in a deeper economic downturn than they had previously expected as they worried that Powell's call for additional stimulus would go unanswered. Dow Jones fell 519.97 points, or 2.19%, to 23,244.81, the S&P 500 lost 50.15 points, or 1.75%, to 2,819.97 and the Nasdaq dropped 139.38 points, or 1.55%, to 8,863.17.

CURRENCIES

The USD edged higher and was up 0.33% on the day at 100.24. The index fell as low as 99.57 earlier in the session.

The stronger dollar sent GBP to its lowest in five weeks. The pound was last down 0.37% at 1.2209 from 1.2340.

EUR tumbled, falling from an early 1.0896 high down towards 1.0811.

USDJPY maintained some balance in the session, up 0.09% at 107.05.

AUD crumbled under the weight of a stronger USD, falling over 0.30% from a 0.6524 high down towards 0.6439 lows.

NZD slid 1.8% from 0.6055 to 0.5980 after the RBNZ doubled the amount of bonds it was buying and opened the door to negative interest rates.

AUDNZD maintained its bullish stance after catapulting 1.12% through 1.0700 to a fresh 1.0783 high.

AUDEUR was softer overnight, falling from 0.6000 down towards 0.5955.

TREASURIES

U.S. Treasury yields were steady after Fed's Powell gave a solemn assessment of the U.S. economy and investors showed soft demand for a 30-year bond auction. Investors showed only moderate demand for a $22 billion afternoon auction of 30-year bonds, after strong demand for a 10-year issuance on Tuesday.

The benchmark 10-year yield was down 4.1 basis points at 0.6509% in afternoon trading.

The 2-year U.S. Treasury yield was down 1.2 basis points at 0.1609% in afternoon trading.

The gap between yields on two- and 10-year Treasury notes was at 49 basis points, down a basis point from Tuesday's close.

Euro zone government bond yields fell as fixed income assets were supported by concern over the pace of economic recovery and the risk of a second wave of coronavirus infections. Safe-haven bond yields fell.

The German 10-year benchmark was set to close the session lower after three consecutive sessions of rises. It was down 2 bps on the day to -0.53%.

Italian 10-year government bond yield rose in early trading before changing direction and was last down 8 bps to 1.80%.

Benchmark iron ore futures in China jumped to their highest level in over nine and a half months, driven by higher demand as steel mills ramped up output amid improving profit margins. The most active iron ore futures on the Dalian Commodity Exchange climbed as much as 2.4% to 647 yuan ($91.22) per tonne. The contract closed up 2.1%, its highest level since Aug. 1. Spot prices of iron ore with 62% jumped 5% so far in May, and stood at $88.80.

Copper prices eased on fears of a second wave of coronavirus infections. New infections have been reported in the last two weeks in Chinese cities including Wuhan, the epicentre of the first wave, and in South Korea, leading to fresh restrictions to control the spread. Three-month LME copper was 0.6% lower at $5,221 a tonne.

Oil prices fell about 2% despite the first decline in U.S. crude inventories since January. Brent crude settled down 79 cents, or 2.6% at $29.19 a barrel. WTI crude futures settled down 49 cents, or 1.9% at $25.29 a barrel.

ECONOMIC CALENDAR TODAY

Australia - April employment (last 5.9k, forecast -550k). The Coronavirus impact to be revealed in full comprehensive jobs report.

Australia - April unemployment rate (last 5.2%, forecast 8.3%). Unemployment rate to spike higher as the full brunt of the downturn starts to be realised.

US - initial jobless claims (last 3.169m). Whilst at all time record levels has been showing some improvement and trending lower over the weeks.

AUD THOUGHTS AND TECHNICAL ANALYSIS

AUD lost all of its early gains, falling aggressively yet again as U.S. stocks tumbled back into the red overnight. AUD reached a 0.6524 high but fell on the U.S. open to a 0.6439 low.

The catalyst was Fed's Powell gloomy economic outlook and push back on negative rates which ultimately saw risk sour, pulling stocks & treasuries lower while the USD climbed higher against a basket of currencies. USDJPY buying also drove AUDJPY lower near 68.95.Today we have the eagerly awaited Australian employment / unemployment economic data released at 11.30am. The timing of the labour force survey – covering the first two weeks of the month – meant the March update did not capture the impact of broad based lockdowns implemented late in the month. That is not going to be the case in April which will reflect the full scale of the virus hit. All signs suggest the fall-out has been brutal with recent data based on ATO payroll information indicating close to a million workers have been rendered inactive. The main question is how this will be reflected in the official statistics given the specific classifications used (e.g. with payrolls a measure of jobs, not employees, and with most JobKeeper recipients likely be considered employed) and other technical differences (including adjustments for population growth and seasonality).Unemployment nudged up to 5.2% in March but is set to spike sharply in April. As with the employment number, there is some uncertainty around how inactive workers are classified – those receiving support from the Federal Government's JobKeeper scheme should be classified as employed even if they were not active in the survey week (they will be classed as employed but working no hours). A second consideration is how many of those moving out of jobs exit the labour market altogether. Note that to be considered unemployed in the survey, individuals must be available to work in the survey week and actively looking for work. The participation rate is expected to dip from 66% to 65.8%, giving a spike in the unemployment rate to 8.3%. Measures of underemployment, which are less affected by these definitional vagaries, will show a much bigger jump.Overnight the main focus will be on the U.S. jobless claims number - a continuation in the number is expected but the focus will remain on any improvement in the weekly data series.For the AUD, opens this morning at 0.6450 with a slightly bearish edge to it.AUD dropped below the 10 day moving average but trades close to the midpoint of the 0.6370-0.6570 range in place since April 30. The lack of an intense downside move for AUD suggests investors believe bullish factors remain. While U.S. rates rallied after Powell they still remain low and fed funds futures still price in negative rates for March 2021. AUD investors could also be looking at buoyant copper and iron-ore futures prices, which could help temper any downside AUD moves. Should AUD/USD continue to consolidate gains from the March-April rally and hold above support near 0.6370 a test of the big 0.6670/90 zone can't be ruled out. If risk sentiment deteriorates sharply though AUD's downside risks will grow.RSIs fall & AUD is below the 10-DMA, techs lean bearish for nowImmediate support at 0.6440 followed by 0.6415 and 0.6373 (last week’s low).